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Corporate governance

BTís policy is to achieve best practice in our standards of business integrity in all our operations. This includes a commitment to maintaining the highest standards of corporate governance and ethics throughout the group.
      The company took part in the consultations leading up to the publication in July 2003 of the UKís new Combined Code on Corporate Governance. BT is obliged this year to report on how it has applied the previous version of the Combined Code. The directors consider that BT has, throughout the year, complied with the provisions of that version of the Code. This section also reports on BTís position in respect of the provisions introduced by the new Combined Code. The company will report fully on its compliance with the new Code next year.

The Board
Composition and role
The Board, which operates as a single team, is currently made up of the part-time Chairman, the Chief Executive, four other executive directors and seven non-executive directors. All of the non-executive directors meet the criteria for independence set out in the new Combined Code and are therefore considered by the Board to be independent. It is BTís policy that the Board will comprise a majority of independent non-executive directors. The directorsí biographies are available in the Board of directors and Operating Committee section.

     The Boardís principal focus is the overall strategic direction, development and control of the group. In support of this the Board approves the groupís values, business practice policies, strategic plans, annual budget, capital expenditure and investments budgets, larger capital expenditure proposals and the groupís overall system of internal controls, governance and compliance authorities. It also has oversight and control of the groupís operating and financial performance. These responsibilities are set out in a formal statement of the Boardís role. The Board has agreed the groupís corporate governance framework, as part of which it has empowered the companyís key management committee, the Operating Committee, to make decisions on operational and other matters. The roles and powers of these committees are set out later in this report under Principal Board committees. Their powers and the authorities delegated to individual members of the Operating Committee are available to everyone in the group on the groupís intranet site.
     The Board meets every month, except in August. Additionally, it meets on an ad hoc basis to consider matters which are time critical. The Board met 11 times during the 2004 financial year.
     The roles of the Chairman and the Chief Executive are set out in written job descriptions. In addition to chairing the Board, the Chairman is responsible for consulting the non-executive directors, particularly the Deputy Chairman, on corporate governance issues, matters considered by the Nominating Committee, which the Chairman chairs, and the individual performances of the non-executive directors. With the Chief Executive and the Secretary, he ensures theBoard is kept properly informed, is consulted on all issues reserved to it and that its decisions are made in a timely and considered way that enables the directors to fulfil their fiduciary duties. The Chairman ensures that the views of the shareholders are known to the Board and considered appropriately. He represents the company in specified strategic and Government relationships, as agreed with the Chief Executive, and generally acts as the bridge between the Board and the Companyís executive team, particularly on the Groupís broad strategic direction. The Chief Executive has final executive responsibility to the Board for the success of the group.
     The Secretary manages the provision of timely, accurate and considered information to the Board for its meetings and, in consultation with the Chairman and Chief Executive, at other appropriate times. He recommends to the Chairman and the Chief Executive, for Board consideration where appropriate, the companyís corporate governance policies and practices and is responsible for their communication and implementation.

BTís non-executive directors
The desired combination of experience, skills and other attributes that the non-executive directors as a whole are to bring to the Board is agreed and reviewed by the Nominating Committee. This profile is used by the Committee to assess the suitability as non-executive directors of candidates put forward by the directors and outside consultants before the Committee meets short-listed candidates and goes on to recommend to the Board a candidate for appointment.
     The non-executive directors provide a strong, independent element on the Board. Between them, they bring experience and independent judgement, gained at the most senior levels, of international business operations and strategy, marketing, technology, communications and political and international affairs. The Chairman and the non-executive directors hold regular dinners at which they discuss matters without the executive directors being present. At least annually, these provide an occasion for the non-executive directors, led by the Deputy Chairman, Sir Anthony Greener, to meet, without the Chairman present to review the Chairmanís performance.
     Sir Anthony Greener, the Deputy Chairman, is the senior independent director. He chairs the Audit and Remuneration committees. In his capacity as the chairman of the Remuneration Committee, he meets with BTís major institutional shareholders. The Deputy Chairman also continues to be available to discuss matters with institutional shareholders where it would be inappropriate for those discussions to take place with either the Chairman or the Chief Executive. He will also attend, at his discretion and in consultation with the Chairman and the Chief Executive, other meetings with shareholders during the year. The other non-executive directors may attend, at their request, meetings with the companyís major shareholders and others.
    
Non-executive directors are appointed initially for three years, subject to three monthsí termination notice from either BT or the director. At the end of the first three years the appointment may be continued by mutual agreement. Each non-executive director is provided, upon appointment, with a letter setting out the terms of his or her appointment, including membership of Board committees, the fees to be paid, the time commitment expected from the director and covering such matters as the confidentiality of information and the companyís share dealing code. The appointment letter was reviewed by the Nominating Committee following the publication of the new Combined Code and new letters sent to all non-executive directors which align the companyís letter, as appropriate, to the sample letter annexed to the new Code.

Election and re-election
All directors are required by the companyís articles of association to be elected by shareholders at the first AGM after their appointment, if appointed by the Board. A director must subsequently retire by rotation at an AGM at intervals of not more than three years. The director may seek re-election.

Service agreements
The Chairman and executive directors have service agreements, which are approved by the Remuneration Committee. Information about the periods of these contracts is in the Report on directorsí remuneration.

Independent advice
The Board has a procedure for directors, in furtherance of their duties, to take independent professional advice if necessary, at the companyís expense. In addition, all directors have access to the advice and services of the Secretary, the appointment and removal of whom is a matter for the whole Board. He advises the Board on appropriate procedures for the management of its meetings and duties (and the meetings of the companyís principal committees), as well as the implementation of corporate governance and compliance within the group.

Training and information
On appointment, the directors take part in an induction programme when they receive information about BT, the role of the Board and the matters reserved for its decision, the terms of reference and membership of the principal Board and management committees, and the powers delegated to those committees, the companyís corporate governance practices and procedures, including the powers reserved to the groupís most senior executives, and the latest financial information about the group. This is supplemented by visits to key BT locations and meetings with members of the Operating Committee and other key senior executives. Throughout their period in office the directors are continually updated on BTís business, the competitive and regulatory environments in which it operates, technology and corporate social responsibility matters and otherchanges affecting BT and the communications industry as a whole, by written briefings and meetings with senior BT executives. Directors are also advised on appointment of their legal and other duties and obligations as a director of a listed company, both in writing and in face-to-face meetings with the Secretary. They are reminded of these duties each year and they are also updated on changes to the legal and governance requirements upon the company and themselves as directors. During the 2004 financial year, for example, they have been advised on the changes to UK corporate governance brought about by the new Combined Code, continued to receive briefings on the US Sarbanes-Oxley Act of 2002, which affects BT because its securities are registered with the US Securities and Exchange Commission (SEC), and various corporate proposals from the European Commission. They also received an updated briefing on UK, US and international financial reporting developments.
     Guidelines are in place concerning the content, presentation and delivery of papers for each Board meeting, so that the directors have enough information to be properly briefed sufficiently far ahead of each Board meeting and at other appropriate times.

Board evaluation
During summer 2003 the Board carried out, through a questionnaire and discussion with directors, an evaluation of its performance and the quality of board processes. The results of that exercise were considered by the Board in July 2003 and a number of actions agreed. A further evaluation, including on the performance of directors and the Boardís committees, will be carried out during 2004.

Directorsí and officersí liability insurance and indemnity
For some years the company has purchased insurance to cover its directors and officers against their costs in defending themselves in civil legal proceedings taken against them in that capacity and in respect of damages resulting from the unsuccessful defence of any proceedings. To the extent permitted by UK law, the company also indemnifies its directors and officers. Neither the insurance nor the indemnity provide cover where the director has acted fraudulently or dishonestly.

Principal Board committees
To meet best corporate governance practice, Audit, Remuneration and Nominating Committees have long been an established part of BTís system of governance. Each committee has written terms of reference, which are available on the companyís website. The minutes of Audit and Nominating Committee meetings are sent, at their request, to directors who are not a member of a committee. In the case of the Remuneration Committee, minutes are circulated, on request, to other non-executive directors as well as to members of the committee.

Audit Committee
The Audit Committee is chaired by Sir Anthony Greener, the Deputy Chairman and senior independent director. The other members are Maarten van den Bergh, Clay Brendish, Lou Hughes, John Nelson and Carl Symon. They are all independent non-executive directors. They were members of the committee throughout the 2004 financial year. The Board considers that the Committeeís members have broad commercial experience and extensive business leadership, having held various roles in accountancy, financial management and supervision, treasury and corporate finance and that there is a broad and suitable mix of business, financial and IT experience on the Committee. The Board has reviewed membership of the Committee and is satisfied, for the purposes of the new Combined Code, that collectively the Committee has recent and relevant financial experience.
     The Committee recommends the appointment and reappointment of the companyís external auditors and considers their resignation or dismissal, recommending to the Board appropriate action to appoint new auditors. It ensures that key partners are rotated at appropriate intervals. It discusses with the auditors the scope of their audits before they commence, reviews the results and considers the formal reports of the auditors and reports the results of those reviews to the Board. It reviews the auditorsí performance, including the scope of the audit, and recommends to the Board appropriate remuneration.
     As a result of regulatory or similar requirements, it may be necessary to employ the companyís external auditors for certain non-audit work. In order to safeguard the independence and objectivity of the external auditors, the Board has determined policies as to what non-audit services can be provided by the companyís external auditors and the approval processes related to them. Under those policies work of a consultancy nature will not be offered to the external auditors unless there are clear efficiencies and value added benefits to the company. The overall policies and the processes to implement them were reviewed and appropriately modified in the light of the provisions of the US Sarbanes-Oxley Act of 2002 relating to non-audit services that external auditors may not perform. The Audit Committee monitors the extent of non-audit work being performed by the companyís auditors and approves such work before it is undertaken. It also monitors the level of non-audit fees paid to the external auditors.
     The Audit Committee reviews the companyís published financial results, the Annual Report and Form 20-F and other published information for statutory and regulatory compliance. It also reviews the disclosure made by the Chief Executive and Group Finance Director during the certification process for the annual report about the design or operation of internal controls or material weaknesses in the controls, including any fraud involving management or other employees who have a significant role in the companyís financial controls. The Board, as required by UK law, takes responsibility for all disclosures in the annual report.
     The Audit Committee monitors and reviews the standards of risk management and internal control, the effectiveness of internal control, financial reporting, accounting policies and procedures, and the companyís statements on internal controls before they are agreed by the Board for each yearís annual report. It also reviews the companyís internal audit function and its relationship with the external auditors, including internal auditís plans and performance. It reviews the arrangements for dealing, in confidence, with complaints from employees about accounting or financial management impropriety, fraud, poor business practices and other matters. At each of its meetings, the Committee sets aside time to seek the views of the companyís internal and external auditors in the absence of executives.
     The Group Finance Director, the Secretary, the groupís chief internal auditor and the companyís external auditors attend the Committeeís meetings. The Committee met four times during the 2004 financial year. At its meetings the Committee has reviewed the companyís full year and quarterly results and its Annual Report and Form 20-F and considered the adequacy of the financial systems that have produced those results. It has reported its views to the Board so it has been able to approve the results announcements and the annual report for publication. It has also during the 2004 financial year considered the groupís risk register, as submitted to it by the Management Council, and reviewed the companyís internal control, accounting systems, IT security and related matters. It also approved the arrangements for employees to make confidential complaints about accounting and other issues and adopted, for the purposes of the Sarbanes-Oxley Act, a code of ethics for the Chief Executive, Group Finance Director and Director Group Financial Control and Treasury, which is consistent with BTís overall statement of business ethics.

Remuneration Committee
The Remuneration Committee comprises solely independent non-executive directors and is chaired by Sir Anthony Greener. It met four times during the 2004 financial year. Further details about the Committee are included in the Report on directorsí remuneration.

Nominating Committee
The Nominating Committee consists of the Chairman, the Deputy Chairman, John Nelson and Maarten van den Bergh. Its members have not changed during the 2004 financial year. It ensures an appropriate balance of experience and abilities on the Board, using this evaluation to review the size and composition of the Board and to recommend any proposed changes to the Board. It keeps under review the need for appointments to the Board, prepares a description of the specific experience and skills needed for an appointment, considers candidates who are put forward by the directors and external consultants, and recommends to the Board the appointments of all directors after having met short-listed candidates. It also reviews the time required from the Deputy Chairman and other non-executive directors to carry out their duties and advises the Board on succession planning for the positions of the Chairman, Deputy Chairman, Chief Executive and all other Board appointments. The Committee met once during the 2004 financial year at which time it reviewed the current structure profile and balance of the Board, reviewed and recommended to the Board the continued appointments as non-executive directors of Sir Anthony Greener and Maarten van den Bergh (neither of whom took part in the review of his own position) and agreed changes to the non-executive directorsí letter of appointment to align it to recommended best practice.

Meetings attendance
The following table shows the attendance of directors at meetings of the Board and Audit, Remuneration and Nominating committees during the 2004 financial year.

      Audit   Remuneration   Nominating  
  Board   Committee   Committee   Committee  








 
      (attendance is shown only for a committee  
              member)  
Number of meetings/                
   Director 11   4   4   1  
Sir Christopher Bland 11           1  
Maarten van den Bergh 9   4   3   1  
Clay Brendish 11   3          
Pierre Danon 11              
Andy Green 11              
Sir Anthony Greener 10   4   4   1  
Lou Hughes 11   4   4      
Margaret Jay 11       3      
Ian Livingston 11              
John Nelson 11   4       1  
Paul Reynolds 11              
Carl Symon 11   4   4      
Ben Verwaayen 11              








 

Operating Committee and Management Council
The Chief Executive, Ben Verwaayen, chairs the
Operating Committee, which meets weekly. The other members are the Group Finance Director, the Chief Executives of BT Retail, BT Wholesale and BT Global Services and the Chief Broadband Officer. The Secretary attends all meetings. The Committee has collective responsibility for running the groupís business end-to-end. To do that, it develops the groupís strategy and budget for Board approval, recommends to the Board the groupís capital expenditure and investments budgets, monitors the financial, operational and customer quality of service performance of the whole group, allocates resources across the group within plans agreed by the Board, plans and delivers major cross-business programmes and reviews the senior talent base and succession plans of the group. Within the groupís corporate governance framework, approved by the Board, the Operating Committee is empowered to approve up to limits after which Board approval is required, capital expenditure, disposals of fixed assets, the making of investments by the group and divestments. It is authorised to delegate these approvals, up to its own limits, to senior executives.
     A sub-committee of the Operating Committee, the Management Council, meets monthly. It consists of the Operating Committee members plus a number of other senior executives. It is an advisory forum supporting the Chief Executive and the Operating Committee in policy formulation, in areas such as cultural change, public policy, reputation and business practices policies, human resources, pensions matters and employment policies.

Internal control and risk management
The Board is responsible for the groupís systems of internal control and risk management and for reviewing the effectiveness of those systems. Such systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives; any system can provide only reasonable and not absolute assurance against material misstatement or loss.
     The Board also takes account of significant social, environmental and ethical matters that relate to BTís businesses and reviews annually BTís corporate social responsibility. The companyís workplace practices, specific environmental, social and ethical risks and opportunities and details of underlying governance processes are dealt with in Our people and Our commitment to society.
     BT has processes for identifying, evaluating and managing the significant risks faced by the group. These processes have been in place for the whole of the 2004 financial year and have continued up to the date on which this document was approved. The processes are in accordance with the guidance for directors published in the UK in September 1999.  
     Risk assessment and evaluation takes place as an integral part of the groupís annual strategic planning cycle. The group has a detailed risk management process, culminating in a Board review, which identifies the key risks facing the group and each business unit. This information is reviewed by senior management as part of the strategic review. The groupís current key risks are summarised in Risk factors.
     The key features of the risk management process comprise the following procedures:
blue square senior executives, led by the Secretary, review the groupís key risks and have created a group risk register, describing the risks, owners and mitigation strategies. This is reviewed by the Management Council before being reviewed and approved by the Board.
blue square the lines of business carry out risk assessments of their operations, have created registers relating to those risks, and ensure that the key risks are addressed.
blue square senior management report regularly to the Group Finance Director on the operation of internal controls in their area of responsibility.
blue square the Chief Executive receives annual reports from senior executives with responsibilities for major group operations with their opinion on the effectiveness of the operation of internal controls during the financial year.
blue square the groupís internal auditors carry out continuing assessments of the quality of risk management and control. Internal Audit reports to the management and the Audit Committee on the status of specific areas identified for improvement. They also promote effective risk management in the lines of business operations.
blue square the Audit Committee, on behalf of the Board, considers the effectiveness of the operation of internal control procedures in the group during the financial year. This follows consideration of the matter by the Management Council. The Audit Committee reviews reports from the internal auditors and from the external auditors and reports its conclusions to the Board. The Audit Committee has carried out these actions for the 2004 financial year.
     Material joint ventures and associates, which BT does not control, outside the UK have not been dealt with as part of the group for the purposes of this internal control assessment.
     The Board has approved the formal statement of matters which are reserved to it for consideration, approval or oversight. It has also approved the groupís corporate governance framework, which sets out the high level principles by which the group is managed and the responsibilities and powers of the Operating Committee, Management Council and the groupís senior executives. As part of this framework the development and implementation of certain powers relating to group-wide policies and practices are reserved to identified senior executives.

Relations with shareholders
Senior executives, led by the Chief Executive and the Group Finance Director and including, as appropriate, the other executive directors, hold meetings with the companyís principal institutional shareholders to discuss the companyís strategy, financial performance and specific major investment activities. The Deputy Chairman also attends, at his discretion and in consultation with the Chairman and the Chief Executive, meetings with shareholders during the year. As explained in the Report on directorsí remuneration, we also maintain contact, when appropriate, through the chairman of the Remuneration Committee and other senior executives to discuss overall remuneration policies and plans. Contact with institutional shareholders (and with financial analysts, brokers and the media) is controlled by written guidelines to ensure the protection of share price sensitive information that has not already been made generally available to the companyís shareholders. The directors are provided with reports and other written briefings from the companyís major shareholders and analysts, either in full or through summaries from the companyís brokers and are regularly informed by the Secretary about the holdings of its principal shareholders. The Secretary also surveys the companyís retail shareholders about the quality of the companyís shareholder communications and share registration services.
     We are continuing our policy that shareholders vote on the annual report at the AGM. Shareholders will also again be asked to vote on the Report on directorsí remuneration.
     It is part of our policy to involve shareholders fully in the affairs of the company and to give them the opportunity at the AGM to ask questions about the companyís activities and prospects. We also give the shareholders the opportunity to vote on every substantially different issue by proposing a separate resolution for each issue. The Boardís opinion is that the re-election and the fees of the auditors are interrelated matters and should therefore be dealt with in one resolution.
     The proxy votes for and against each resolution, as well as abstentions, will be counted before the AGM and the results will be made available at the meeting after the shareholders have voted on each resolution on a show of hands and at the end of the meeting. It is our policy for all directors to attend the AGM if at all possible. Whilst, because of ill health or other pressing reasons, this may not always be possible, in normal circumstances this means that the chairman of the Audit, Nominating and Remuneration committees is at the AGM and is available to answer relevant questions.
     The Annual Review and, if requested, the Annual Report and Form 20-F, together with the Notice of the AGM, are sent to shareholders in the most cost-effective fashion, given the large number of shareholders. We aim to give as much notice as possible and at least 21 clear days, as required by the companyís articles of association. In practice, these documents are being sent to shareholders more than 20 working days before the AGM.
     Established procedures ensure the timely release of share price sensitive information and the publication of the companyís financial results and regulatory financial statements.

Statement of business practice
To reinforce our commitment to achieve best practice in our standards of business integrity and ethics, BT has a written statement of business practice (The Way We Work). The statement covers all our operations and reflects the expectations in the area of corporate governance and business practice standards. A copy of the statement has been sent to every employee.
     These high-level principles are supported by a continuing and comprehensive communications programme and online training. A confidential helpline and e-mail facility are also available to employees who have questions about the application of these principles. We also continue to require our agents and contractors to apply these principles when representing BT.

Political donations
It has always been BTís policy that no company in the group shall make cash contributions to any political party. This policy continues and appropriate arrangements are in place to implement it throughout the group. However, the Companies Act 1985 requires companies to obtain shareholder authority before they can make donations to EU political organisations (which includes UK political parties). The definition of political donations used in the Act is very much broader than the sense in which these words are ordinarily used. As a result, it covers activities which form part of normal relationships between BT, individual politicians and the principal political parties. These activities are not designed to provide support to or to influence public support for any political party. They would not be thought of as political donations in the everyday sense of these words. They are entirely non-political in nature and are designed so that BT can make MPs and others aware of key industry issues and matters affecting the company.

     The authority we are requesting from shareholders at the AGM is not designed to change the companyís stated policy of not making cash contributions. It will, however, ensure that BT acts within the provisions of the current UK law when carrying out the above activities. They are carried out on an even-handed basis related broadly to the major UK political partiesí electoral strength and the company believes that they make an important contribution to the success of BT. The level of political donations split as between the major UK political parties is shown in the Report of the directors.

Pension funds
BTís two main pension funds Ė the BT Pension Scheme and the BT Retirement Plan Ė are not controlled by the Board but by separate trustees who are company and union nominees, under independent chairmen. The trustees look after the assets of the funds, which are held separately from those of the company. The pension fundsí assets can only be used in accordance with their respective rules and for no other purpose.

Financial
A statement by the directors of their responsibilities for preparing the financial statements is included in the Statement of directorsí responsibility. The directors report states that the company is a going concern.

US Sarbanes-Oxley Act of 2002
BT has securities registered with the US Securities and Exchange Commission (SEC). As a result, BT is obliged to comply with those provisions of the Sarbanes-Oxley Act (the Act) applicable to foreign issuers. BT will comply with the legal and regulatory requirements introduced pursuant to this legislation, in so far as they are applicable to the group.
     Given the narrow and prescriptive definition under the relevant SEC rules, it is the opinion of the Board that the Audit Committee does not include a member who is an Ďaudit committee financial expertí. However, the Board considers that the Committeeís members have broad commercial experience and extensive business leadership, having held various roles in accountancy, financial management and supervision, treasury and corporate finance and that there is a broad and suitable mix of business, financial and IT experience on the Committee. The Board and its committees will keep under active review the financial expert matter during the 2005 financial year as part of their nomination and succession planning activities.
     The Chief Executive and Group Finance Director, after evaluating the effectiveness of BTís disclosure controls and procedures as of the end of the period covered by this Annual Report and Form 20-F, have concluded that, as of such date, BTís disclosure controls and procedures were effective to ensure that material information relating to BT was made known to them by others within the group. The Chief Executive and Group Finance Director have also provided the certifications required by the Act.
     There were no changes in BTís internal control over financial reporting that occurred during the year ended 31 March 2004 that have materially affected, or are reasonably likely to materially affect, BTís internal control over financial reporting.
     The code of ethics for the Chief Executive, Group Finance Director and Director Group Financial Control and Treasury, adopted for the purposes of the Act, is posted on the companyís website.

The New York Stock Exchange
In November 2003, the SEC approved the new corporate governance listing standards of the New York Stock Exchange (NYSE). The company, as a foreign issuer with American Depositary Shares listed on the NYSE, is obliged to disclose any significant ways in which its corporate governance practices differ from these standards.
     The company has reviewed the NYSEís new listing standards and believes that its corporate governance practices are consistent with them, with one exception where the company does not meet the strict requirements set out in the standards. The standards state that companies must have a nominating/corporate governance committee composed entirely of independent directors and with written terms of reference which, in addition to identifying individuals qualified to become board members, develops and recommends to the Board a set of corporate governance principles applicable to the company. BT has a Nominating Committee. It does not develop corporate governance principles for the Boardís approval. The Board approves the groupís overall system of governance internal controls, governance and compliance authorities. The Board and the Nominating Committee are made up of a majority of independent, non-executive directors.

 

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